Tuesday, 24 October, 2017

RBI's monetary policy committee likely to cut poilcy rates today

At a low level of development it is not a good move to grant autonomy to a central bank where coordinated monetary and fiscal policies are required RBI May Slump Key Interest Rate Today ; Might be the Lowest Since November 2010 Inflation
Juana Turner | 03 August, 2017, 01:01

India's Monetary Policy Committee (MPC) of Reserve Bank on Wednesday cut repo rates by 25 basis points (bps) to 6 percent, lowest in the last seven years, but home loans Equated Monthly Installments (EMI) won't be slashed.

"There is scope for banks to reduce lending rates", RBI governor Urjit Patel said.

Four members of the monetary policy committee voted to cut rates by 25 bps, while one voted for a 50 bps cut and one voted for leaving rates unchanged.

In its June review meet, the MPC had held the repo rate citing the risk of fiscal slippages, which could entail inflationary spillovers.

Food prices have been coming down, bringing inflation rates in India to new lows in recent months.

"Excluding the HRA impact which will affect the CPI cumulatively, inflation would be a little over 4 per cent by fourth quarter as against 4.5 per cent inclusive of the HRA in the June statement (of RBI policy)", Patel said. "Given our expectation of both growth and inflation rising over the next six to 12 months, we expect a prolonged pause from the RBI", Nomura said.

The repo rate - the rate at which the central bank lends to commercial banks - now stands at 6.0 percent - a 6½ year low - from a 6.25 percent earlier.

The Governor said that with inflation expected to rise, the MPC made a decision to maintain its neutral policy stance.

It can be noted that even after the introduction of the MCLR and rate cuts that happened, the RBI has been repeatedly complaining about banks not doing enough to pass on the full benefit of its rate actions to the borrowers and help revive the sagging private investment for economic growth. Chandrajit Banerjee, Director General, CII said, "CII feels that a steeper cut in interest rate would have been more in consonance with market realities". Yes Bank MD and CEO Rana Kapoor said: "India's inflation has undergone a structural shift, with the emergence of "new normal" at lower levels". A rate cut at this moment will boost these sentiments further where footfalls and conversions are bound to increase. Also the rollout of the GST has been smooth and the monsoon normal. The RBI may lower them but the various banks are in no position to transmit these rates as they are burdened by huge non-performing loan portfolios.

After a 25 bp cut in October, the RBI has kept rates at 6.25 percent and shocked markets by changing its stance to "neutral" from "accommodative" in February.

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